In
my last
blog, I wrote generally about the "upheaval" or "cross roads" that public sector
collective bargaining finds itself in today. See also Unions’
Role in “the New Normal”. This second blog looks specifically at issues of public sector compensation and reform, particularly pension reform of which I've also written before. See Public
Sector Pensions -- The Times They are a-Changin'.
Such reforms range from attempts to limit the scope of public bargaining as it relates to compensation; the move from defined contribution (DC) to defined benefit (DB)
pension plans; establishment of two-tier plans with significantly less generous benefits going forward; reduction in annual COLA adjustments to retiree pension benefits; increases in annual contributions; new and heightened eligibility requirements for benefits; efforts to reduce retiree health care benefits; layoffs and furloughs; wage freezes and cuts; and "downsizing or right-sizing government." Id.; see also R. Theodore Clark, Jr., Public Sector Collective Bargaining at the crossroads, The Urban Lawyer, Vol. 44, No. 1, Winter 2012; and Robert Clark, Evolution of Public-Sector Retirement Plans: Crisis, Challenges, and Change, ABA Journal.
As with the my last blog, I am struck how the commentators represent pretty divergent views on the factual cause and moral justification of the demand for these reforms. For instance, Eric M. Madiar states bluntly in the first sentence of his article that "[p]ublic pension benefits are under siege," and goes on to add that this is so "for two reasons: opportunity and political motives." See Public Pension Benefits Under Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants?", ABA Journal of Labor & Employment Law, Vol. 27, No. 2, Winter 2012 ("ABA Journal"). In Madiar's view, conservative politicians jumped on the "opportunity" of the 2008 stock market crash to "arm-wrestl[e] over money." He argues it is simply easier and more palatable to cut pension benefits of public employees "than to raise taxes, cut services, or both."
In this context, though, Jeffrey H. Keefe concludes the pension "crisis" is not so bad. Evidencing that crisis like beauty may be in the eye of the beholder, he argues that "state and local plans do not face an immediate liquidity crisis" because "most plans will be able easily to cover benefit payments for the next fifteen to twenty years." See State and Local Public Employees: Are They Overcompensated?, ABA Journal.
In contrast, R. Theodore Clark, Jr. documents that pension reform efforts have actually been going on for some time, and asserts they have always motivated by the specter of ever growing unfunded liabilities. See Public Sector Collective Bargaining at the crossroads, The Urban Lawyer, Vol. 44, No. 1, Winter 2012. He describes eleven states' attempts at reform between between 2001 and 2010, although such efforts have obviously been seriously ramped up since the 2008 economic crisis.
Clark Jr. also points to a 2010 Pew study that concluded there is now at least a trillion dollar gap in unfunded pension and retiree healthcare liabilities ($555 billion and $452 billion, respectively), although some commentators put that gap in the realm of $3.23 trillion. See Robert Novy-Marx of Univ. of Chicago and Joshua Rauh of Northwestern University (2009). Unlike Keefe, commentator Robert Clark sees in all this cause for great concern, noting: "[s]ome analysts project that several state retirement plans will exhaust their pension funds in the next ten to fifteen years."
Commentators are also split on the veracity of the typical justification for high public sector pensions--lower public sector compensation--and the comparative costs and values of public-private pensions. For instance, Keefe argues that public sector employees are not overcompensated, but rather "slightly uncompensated" (by 5.6%) when "controlling for education, experience, hours of work, gender, race, ethnicity, and disability." In particular, he notes that on average, public sector employees are more highly educated than private sector employees, and he concludes that on average college-educated labor is paid 25% less in the public sector and that the public sector professionals are paid 37% less than private sector counterparts.
In contrast, a number of proponents of pension reform argue that public sector wages or equal to or even higher than private sector employees, and that such benefits are more costly in the pubic sector.
R. Theodore Clark's concludes, based on analysis of Bureau of Labor Statistics (BLS) data, that "at the median" public sector employees receive significantly more compensation than their private sector counterparts:
- state and local government hourly rate is 40.3% higher than the private sector hourly rate;
- public sector employees "receive three more paid holidays, six more paid sick leave days, and approximately two more paid vacations than their counterparts in the private sector;"
- a "not insignificantly higher percentage of state and local government employees have access to medical care benefits, and the cost ... to prove these benefits is substantially higher;"
- "percentage of public employees who have retiree health care benefits is approximately four times as great as" in private sector;
- more public sector than private sector employees have pension benefits, and public sector employees more typically have a defined benefit pension rather than the defined contribution pension as in private sector today; and
- the cost of providing public sector pension or retirement benefits is more than twice as expensive as providing such benefits in the private sector.
Id.; see also Roger Lowenstein, While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis.
To this long laundry list of enhanced public sector compensation factors, some commentators would add the considerable job security in the public sector. 2010 BLS data indicating "the average private-sector worker had a 17.8% change of being discharged or laid off during the year, while the average public employee had a 6.8% change of involuntary job loss." Andrew G. Biggs & Jason Richwine argue that this amounts to a 15% increase in compensation. See Are California Public Employees Overpaid? (2011, Heritage Foundation).
Biggs & Richwine also point out elsewhere that both sides of the debate about relative under- or over-compensation often fail to accurately value public sector defined benefit pensions. Specifically, they argue that most valuations only look at the amount of money set aside for pensions (i.e. employer cost), and in the process "dramatically undervalue public employees' retirement benefits" since public employers are not setting aside $1 for every $ in pension benefit, as with a defined contribution (DC) plan. Additionally, guaranteed DC plans are inherently more valuable than defined benefit (DB) plans, which are subject to market losses. Adjusting for these factors, the authors conclude that public sector pension values are three times higher than reported by some commentators, and may amount to 25-37% of wages. See The Effect of Pension Accounting Rules on Public-Private Pay Comparisons, ABA Journal (the authors note that a similar adjustment in valuation would be required for private sector defined benefit programs, but "because they are less common and less generous in the private sector, the adjustments would be relatively small").
Such reforms range from attempts to limit the scope of public bargaining as it relates to compensation; the move from defined contribution (DC) to defined benefit (DB)
pension plans; establishment of two-tier plans with significantly less generous benefits going forward; reduction in annual COLA adjustments to retiree pension benefits; increases in annual contributions; new and heightened eligibility requirements for benefits; efforts to reduce retiree health care benefits; layoffs and furloughs; wage freezes and cuts; and "downsizing or right-sizing government." Id.; see also R. Theodore Clark, Jr., Public Sector Collective Bargaining at the crossroads, The Urban Lawyer, Vol. 44, No. 1, Winter 2012; and Robert Clark, Evolution of Public-Sector Retirement Plans: Crisis, Challenges, and Change, ABA Journal.
As with the my last blog, I am struck how the commentators represent pretty divergent views on the factual cause and moral justification of the demand for these reforms. For instance, Eric M. Madiar states bluntly in the first sentence of his article that "[p]ublic pension benefits are under siege," and goes on to add that this is so "for two reasons: opportunity and political motives." See Public Pension Benefits Under Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants?", ABA Journal of Labor & Employment Law, Vol. 27, No. 2, Winter 2012 ("ABA Journal"). In Madiar's view, conservative politicians jumped on the "opportunity" of the 2008 stock market crash to "arm-wrestl[e] over money." He argues it is simply easier and more palatable to cut pension benefits of public employees "than to raise taxes, cut services, or both."
In this context, though, Jeffrey H. Keefe concludes the pension "crisis" is not so bad. Evidencing that crisis like beauty may be in the eye of the beholder, he argues that "state and local plans do not face an immediate liquidity crisis" because "most plans will be able easily to cover benefit payments for the next fifteen to twenty years." See State and Local Public Employees: Are They Overcompensated?, ABA Journal.
In contrast, R. Theodore Clark, Jr. documents that pension reform efforts have actually been going on for some time, and asserts they have always motivated by the specter of ever growing unfunded liabilities. See Public Sector Collective Bargaining at the crossroads, The Urban Lawyer, Vol. 44, No. 1, Winter 2012. He describes eleven states' attempts at reform between between 2001 and 2010, although such efforts have obviously been seriously ramped up since the 2008 economic crisis.
Clark Jr. also points to a 2010 Pew study that concluded there is now at least a trillion dollar gap in unfunded pension and retiree healthcare liabilities ($555 billion and $452 billion, respectively), although some commentators put that gap in the realm of $3.23 trillion. See Robert Novy-Marx of Univ. of Chicago and Joshua Rauh of Northwestern University (2009). Unlike Keefe, commentator Robert Clark sees in all this cause for great concern, noting: "[s]ome analysts project that several state retirement plans will exhaust their pension funds in the next ten to fifteen years."
Commentators are also split on the veracity of the typical justification for high public sector pensions--lower public sector compensation--and the comparative costs and values of public-private pensions. For instance, Keefe argues that public sector employees are not overcompensated, but rather "slightly uncompensated" (by 5.6%) when "controlling for education, experience, hours of work, gender, race, ethnicity, and disability." In particular, he notes that on average, public sector employees are more highly educated than private sector employees, and he concludes that on average college-educated labor is paid 25% less in the public sector and that the public sector professionals are paid 37% less than private sector counterparts.
In contrast, a number of proponents of pension reform argue that public sector wages or equal to or even higher than private sector employees, and that such benefits are more costly in the pubic sector.
R. Theodore Clark's concludes, based on analysis of Bureau of Labor Statistics (BLS) data, that "at the median" public sector employees receive significantly more compensation than their private sector counterparts:
- state and local government hourly rate is 40.3% higher than the private sector hourly rate;
- public sector employees "receive three more paid holidays, six more paid sick leave days, and approximately two more paid vacations than their counterparts in the private sector;"
- a "not insignificantly higher percentage of state and local government employees have access to medical care benefits, and the cost ... to prove these benefits is substantially higher;"
- "percentage of public employees who have retiree health care benefits is approximately four times as great as" in private sector;
- more public sector than private sector employees have pension benefits, and public sector employees more typically have a defined benefit pension rather than the defined contribution pension as in private sector today; and
- the cost of providing public sector pension or retirement benefits is more than twice as expensive as providing such benefits in the private sector.
Id.; see also Roger Lowenstein, While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis.
To this long laundry list of enhanced public sector compensation factors, some commentators would add the considerable job security in the public sector. 2010 BLS data indicating "the average private-sector worker had a 17.8% change of being discharged or laid off during the year, while the average public employee had a 6.8% change of involuntary job loss." Andrew G. Biggs & Jason Richwine argue that this amounts to a 15% increase in compensation. See Are California Public Employees Overpaid? (2011, Heritage Foundation).
Biggs & Richwine also point out elsewhere that both sides of the debate about relative under- or over-compensation often fail to accurately value public sector defined benefit pensions. Specifically, they argue that most valuations only look at the amount of money set aside for pensions (i.e. employer cost), and in the process "dramatically undervalue public employees' retirement benefits" since public employers are not setting aside $1 for every $ in pension benefit, as with a defined contribution (DC) plan. Additionally, guaranteed DC plans are inherently more valuable than defined benefit (DB) plans, which are subject to market losses. Adjusting for these factors, the authors conclude that public sector pension values are three times higher than reported by some commentators, and may amount to 25-37% of wages. See The Effect of Pension Accounting Rules on Public-Private Pay Comparisons, ABA Journal (the authors note that a similar adjustment in valuation would be required for private sector defined benefit programs, but "because they are less common and less generous in the private sector, the adjustments would be relatively small").
What is one to make of all these competing theories and statistics? As I wrote in Part I,"'truth' may be impossible to discern where politics, ideology and crisis intersect." I think most people will likely make of it what they are predisposed to so based on their personal ideology or worldview. Nonetheless, I hope by comparing these different articles to add "important detail and nuance," because we don't necessarily have all the answers even when we feel so certain in our views. I'm called to mind a phrase an old boyfriend used to use: always certain and frequently wrong.
If you have any labor
or employment matters
that you would like to resolve privately through a knowledgeable and experienced
arbitrator or mediator, please feel free to contact Pilar Vaile, P.C. at (505)
247-0802, or info@pilarvailepc.com.
Albuquerque, NM
Sources
Winter 2012 issue of the ABA Journal of Labor & Employment Law
Winter 2012 issue of The Urban Lawyer
Sources
Winter 2012 issue of the ABA Journal of Labor & Employment Law
Winter 2012 issue of The Urban Lawyer
